Business loans are a great way to increase your credit rating. Not only do they provide the funds you need now, but they also help you establish a positive credit history. However, there are a few things to consider when it comes to building your credit through lending. Financing a business isn't always easy, and there are times when you must apply for loans to keep your business running.
But does business lending affect personal credit? The answer is yes. A business loan can have an impact on personal credit ratings, depending on the type of loan and how it is acquired. Maintaining a good line of credit can help improve your company's credit score and position you for better loan terms if you seek funding in the future. Many small business experts suggest that first-time applicants should start with a modest line of credit and pay off debt quickly as a way of creating a credit profile.
If you run a sole proprietorship or a partnership, you're likely responsible for loan repayments. Funds are usually taken from the line of credit using a business checking account, a small business credit card, or even a mobile banking application. Instead of relying on personal credit cards to fund your business, you can opt for loans from your retirement plans, such as the 401 (k). Keeping your small business's finances running smoothly can be difficult in today's fast-paced world.
Lenders check business credit ratings, but they may also check personal credit if they can't find valuable information in business credit. Cyclical businesses often rely on an unsecured line of credit as a source of off-season working capital. The rates of a business line of credit are usually lower than those of a business credit card, which can charge an APR of more than 20% on purchases and even more than on cash advances. Like a small business loan, an unsecured line of credit provides the business with access to money that can be used to cover any business expenses that arise.
However, if you personally guaranteed the loan, you are responsible for repaying it in the event of a company default. If you are a sole trader, the lender must check personal credit ratings before granting a loan to your business. Once you establish a working relationship with suppliers, you can ask them to send payment reports to commercial credit card reporting agencies. However, lenders can request personal credit details from directors and owners before making loans. Loan terms, guarantees, and documentation requirements are subject to Small Business Administration (SBA) guidelines.
If you are a sole trader or run a company, your finances will also be affected by a business loan. Another way business loans don't affect personal credit is when your business has its own business credit card.